Abstract

We examine the contagion effect of residential foreclosures and find
strong evidence of a social interactions influence on default decisions
where the interaction is based on neighborsâ€™ behavior in a
previous period. Using a unique spatially explicit parcel-level dataset
documenting residential foreclosures in Maryland for the years
2006-2009 and a highly localized neighborhood definition, based on
13 nearest neighbors, we find that a neighbor in foreclosure increases
the hazard of additional defaults by 18 percent. This feedback effect
goes beyond a temporary reduction in local house prices and implies
a negative social multiplier effect of foreclosures. (JEL R23, R31)